MDNews - Long Island

HAVE YOU BEEN saving for retirement for a decade or more? In the foreseeable future, something terrif ic is likely to happen w it h your IR A or workplace retirement pla n account — its yea rly ea rnings should beg in to exceed your yearly contributions. W hen could this happen? The tim- i n g depends on severa l fa ctors, a nd the biggest factor may simply be your ability to consistently invest and save. The potentia l for this phenomenon is apparent for both savers who start early and those who start late. SCENARIO 1 Christina star ts saving for retirement at age 23. A f ter college, she ta kes a job pay ing $45,000 a yea r. Each mont h, she directs 10 percent of her sa la r y or $375, into a workplace retirement plan account. The investments in that account earn 6 percent per year. Thirteen years later, Christina is still happily working at the same firm and putting 10 percent of her pay into the retirement plan each month. She now earns $58,200 a year, so her monthly 10 percent contribution has risen over the years from $375 to $485. The ratio of account contributions to account earnings has tilted during this time. After eight years of saving and invest- ing, the ratio is about 2:1 – for every two dollars going into the account, a dollar is earned by its investments. During year 13, the ratio hits 1:1 – the account starts to return more than $500 per month, with a big assist from compound interest. In years after, the 6 percent return on the invest- ments each year tops her year's worth of contributions to the principal. (Her monthly contributions have grown by more than 20 percent during these 13 years, and that also has had an influence.) Fa s t f o r w a r d t o 3 5 y e a r s l a t e r. Christina is 58 yea rs old a nd nea ring retirement age. She earns $86,400 annu- a lly, mea ning her 10 percent monthly sa lar y deferra l has nearly doubled over the years from the initia l $375 to $720. This has helped her build her savings, but not as much as the compounding Dave Rao O ur f ir m does not re nd e r legal or ta x adv ice . T his ar ticle wa s w r it te n for our f ir m and prov id ed cour tes y of MarketingP ro. Investme nts in sec ur ities and in s urance produ cts are: NOT F DIC - INSU R ED/ NOT B A N K- GUA R A N TEED/ M AY LOSE VA LU E . Rao Wealth Par tne rs is an inde pe nde nt f ir m with sec ur ities of fe red through Summit Broke rage Se r vices , Inc., me mbe r FIN R A and SIPC. Advisor y ser vices are of fered through Summit Financial G roup, Inc., a registered investment adviser. Summit is an independent broker- dealer with client a ssets held at First C lear ing, L LC (a wholly ow ned Well s Fargo s ubsidiar y). S ummit and its af f iliates are und e r se parate ow ne rship f rom any othe r named e ntity. The Snowball Effect SAVE AND INVEST, YE AR AF TER YE AR, TO PUT THE FULL POWER OF COMPOUNDING ON YOUR SIDE. interest. At age 58, her account earns about $2,900 per month at a 6 percent rate of return – more than four times her monthly account contribution. SCENARIO 2 Lori needs to start saving for retirement at age 49. Pragmatic, she begins putting $1,000 a month into a workplace retire- ment plan. Her account returns 7 percent a year. (For this example, we will assume Lori maintains her sizable monthly contri- bution rate for the duration of the account.) By age 54, thanks to compound interest, she has $73,839 in her account. After a decade of contributing $12,000 each year, she has $177,403. She manages to work until age 69, and after 20 years, the account holds $526,382. These examples omit some possible negatives and positives. They do not factor in a prolonged absence from the workforce or bad years for the market. Then again, the 6 or 7 percent of consistent returns used above also downplays the chance of the market having some great years. Investors are continually cautioned that past performance is no guarantee or indi- cator of future success. This is true. It is also true that the yearly total return of the S&P 500 (that is, dividends included) aver- aged 10.2 percent between 1917 and 2017. Consider that 10.2 percent average total return in view of all the market cycles Wall Street went through in those 100 years. Keep in mind, when the yearly earnings of your IRA or employer-sponsored retire- ment plan account do start to exceed your yearly contributions, that is not a time to scale back your contributions. Your retirement account will not do all your retirement saving work for you at that point; you still need to keep the momentum of your saving eªort going – and maintain- ing it will assist the compounding. Dave B. Rao is the founder of RAO Wealth Partners. He focuses on advising physi- cians, corporate executives and business owners on their unique financial situa- tions. For more info, visit raowp.com. ■ BY DAVE RAO 1 6❱❱❱❱❱ F I N A N C I A L C H E C K U P

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